The document discusses ratio analysis and its importance in analyzing financial statements. Ratio analysis involves calculating and interpreting financial ratios to assess a firm's performance and financial position. Ratios simplify accounting figures and are helpful for future forecasting and measuring profitability. The document then discusses limitations of ratios and different types of ratios including liquidity, activity, debt, and profitability ratios. It provides examples of specific ratios used to analyze different aspects of a company's financial health.

1. The Analysis of
Financial Statements

2. THE USE OF FINANCIAL
RATOS
 Ratio Analysis involves methods of calculating
and interpreting financial ratios inorder to assess a
firm's performance and status
 Financial Ratio are used as a relative measure,
that facilitates the evaluation of
efficiency or
condition of a particular aspect of a firm's operations

3. IMPORTANCE OF RATIOS
ANALYSING FINANCIAL STATEMENTS
SIMPLIFYING ACCOUNTING FIGURES
HELPFUL IN FUTURE FORECASTING
MEASURING THE PROFITABILIY
TREND ANALYSIS

4. LIMITATIONS OF RATIOS
FALSE RESULTS
LIMITED USE OF SINGLE RATIO
IGNORING QUALITATIVE FACTORS

5. Financial Statements
Balance Sheet‡
Income Statement‡
Cashflow Statement‡
Statement of Retained Earnings

6. Interested Parties
Three sets of parties are interested in ratio
analysis:
Share holders
Creditors
Management

7. Groups of Financial Ratios
Liquidity
Activity
Debt
Profitability

8. Analyzing Liquidity
Liquidity refers to the solvency of the firm's overall
financial position,i.e. a"liquid firm" is one that can
easily meet its short-term obligations as they come
due.
A second meaning includes the concept of converting
an asset into cash with little or no loss in value

9. Three liquidity measures
Net Working Capital(NWC)
N W C = Current Assets -Current Liabilities
Current Ratio (CR ) =Current Assets
Current Liabilities
Quick (Acid-Test)Ratio
(QR ) = Current Assets -Inventory
Current Liabilities

10. Analyzing Activity
Activity is a more sophisticated analysis of
a firm's liquidity, evaluating the speed with
which certain accounts are converted in to
sales or cash;
also measures a firm's efficiency

11. Five important Activity Measure
InventoryTurnover IT = Cost of Goods Sold
Inventory
Average Collection AccountsReceivable
Period(ACP) Annual Sales/360
Accounts Payable
Average Payment
Period = Annual Purchases/360
(APP)

12. Fixed AssetTurnover Sales
(FAT) Net Fixed Assets
T otal
AssetTurnover Sales
(TAT) Total Assets

13. Analyzing Debt
Debt is a true "double-edged" sword as it allows for the
generation of profits with the use of other people's
(creditors) money, but creates claims on earnings with a
higher priority than those of the firm's owners.
Financial Leverage is a term used to describe the
magnification of risk and return resulting from the use of
fixed-cost financing such as debt and preferred stock

14. Measures of Debt
There are Two General Types of Debt Measures
- Degree of Indebtedness
-Ability to Service Debts

15. Debt Ratio(DR ) = Total Liabilities
Total Assets
Debt-Equity = Long-Term Debt
Ratio Stockholders· Equity
(DER )

16. Profitability Measures
Profitability Measures assess the firm's ability
to operate efficiently and are of concern
to,owners,creditors,and management

17. Gross Profit Margin = gross profit
sales
Net profir margin = net profit
sales
Operating profit = operating profit
Margin sales

18. Return on = profit after tax
Total assets total assets
Return on = net profit after taxes
Equity stockholder’s equity

19. EPS = Earning available for
common stock holders
outstanding equity shares
 PE Ratio = mkt price / share
EPS